Outlining the importance of year end planning

Planning ahead of the tax year end on 5 April 2025 is of utmost importance for your clients. The run up to the end of the tax year is an optimal time for ensuring business and personal finances are arranged in the most advantageous way for clients and their families. In this blog post we consider why year end planning is vital for maximising business and personal wealth.

Why is planning ahead important?

Planning ahead of the tax year end is crucial if businesses and individuals are to maximise the reliefs available to them in order to minimise their tax liability. Reviewing financial goals will help to ensure clients’ finances are in the strongest possible position for whatever the future may hold. It is essential to act now in order to minimise tax bills and maximise tax reliefs – clients are advised not to leave it until 5 April 2025. Talking to an accountant in good time will ensure that they can discuss the tax planning opportunities available.

Mercia’s Year End Tax Planning Guide highlights some practical points for your clients to implement into their year end tax plan.

Business measures

Corporation tax

The main rate of corporation tax rose to 25% from 19% on 1 April 2023 for companies with profits over £250,000. The 19% rate is a small profits rate payable by companies with profits of £50,000 or less. Companies with profits between £50,000 and £250,000 pay tax at the main rate reduced by a marginal relief, providing a gradual increase in the effective corporation tax rate.

Capital allowances

Capital allowances permit businesses to write off the cost of capital assets, such as plant and machinery, against their taxable income. The cost of purchasing capital equipment in a business is not a revenue tax deductible expense. However, tax relief is available on certain capital expenditure in the form of capital allowances. The allowances available depend on what you are purchasing.

The Annual Investment Allowance (AIA) provides a 100% deduction for the cost of most plant and machinery, excluding cars, purchased by a business up to an annual limit. Where businesses spend more than the annual limit, any additional qualifying expenditure generally attracts an annual writing down allowance (WDA) of 18% (or 6% for the special rate pool) depending on the type of asset. The AIA is currently set at £1 million.

Rising employers’ National Insurance Contributions (NICs)

In the 2024 Autumn Budget Chancellor Rachel Reeves announced that the employer NIC rate will increase from 13.8% to 15% from 6 April 2025.

The Secondary Threshold, which is currently set at £9,100 a year, is the point at which employers become liable to pay NICs on an individual employee’s earnings. The government will reduce the Secondary Threshold to £5,000 a year from 6 April 2025 until 6 April 2028, and then increase it by Consumer Price Index (CPI) thereafter.

Personal measures

Pension planning

Pensions provide one of the most tax-efficient ways to save, although strategic planning is required to ensure an individual is making the most of theirs

Savers stand to benefit from tax relief on contributions at their marginal rate. Tax relief is available on contributions in any given tax year up to the higher of 100% of net relevant earnings, or £3,600 (gross).

Inheritance tax

Inheritance tax (IHT) is levied on a person’s estate when they die and certain gifts made during an individual’s lifetime.

Gifts between UK-domiciled spouses during their lifetime or on death are exempt from IHT. In this factsheet spouse includes married couples and registered civil partners. Most gifts made more than seven years before death will escape tax. If clients plan in advance, gifts can be made tax-free and could result in a substantial tax saving.

The rate of tax on death is 40%, and 20% on lifetime gifts. Currently, the first £325,000 is chargeable to IHT at 0% and this is known as the nil-rate band. Unused nil-rate band can be passed to the surviving spouse or civil partner. The Residential Nil-Rate Band (RNRB) of £175,000 is available where an interest in a qualifying residence is passed to direct descendants. Together, the nil-rate band and the RNRB potentially give relief of up to £1 million, although restrictions apply where estates are more than £2 million (before reliefs).

Individuals should look to carry out routine IHT planning in order to make best use of all available IHT reliefs and exemptions.